Control or Convenience? Different Approaches Within the G20

Central Bank Digital Currencies - Part 2

In part 1, we looked at the evolution of Central Bank Digital Currencies (CBDC), outlining their inevitability now the rabbit is out of the hat. In this article, we examine the CBDC landscape across the G20 nations, a group that represents 80% of world GDP. CBDCs have so far raised more questions than answers. They are complex, and one size doesn’t fit all. To get this right, we need to ask: what it is we want from them?

The International Money Forum (IMF) lists several advantages of CBDCs, such as financial inclusion and the countering of new private digital currencies (stablecoins). As a supranational body that sees itself as an arbiter of our future, it is unsurprising that they want to control the next generation of money along with everything else.

Yet others feel private sector stablecoins provide the answer as they will embrace new technologies more quickly and efficiently, while providing more choice. This will happen while the state takes a back seat in a purely supervisory role. As for financial inclusion, look no further than Kenya’s M-Pesa, a prelude to stablecoins, which has been a huge success. The lesson is not to bet against the private sector.

There are endless potential CBDC design options that could meet a wide range of objectives. It soon becomes clear that a single CBDC will struggle to reach its potential, and this is perhaps the ongoing discussion within central banking circles.

China has already fired the start gun, and Sweden has a live experiment underway. Yet, the two objectives couldn’t be further apart. China wants its CBDC to boost geopolitical influence and spy on its users. Sweden sees this as improved technology in a country where digital payments are already widespread. Yet still, they had originally planned a launch in 2018, which has already been pushed back to 2026.

It will take time to get this right, and those who treat it as a race will crash. The US Federal Reserve Chairman, Jerome Powell, recently said;

“the U.S. would rather be right than first.”

He’s no fan of stablecoins.

The table lists the status of CBDC projects for G20 members.

We recently marked the 50th anniversary of the closing of the gold window by President Nixon. In the years that followed, FIAT currencies would be worth whatever the markets thought they were worth. It has been a golden era of prosperity for the rich, but for others, the 85% dollar debasement has left them out of pocket.

It is no surprise that these projects reflect national ideologies. Democracies in the developed world are more likely to focus on financial inclusion and efficiencies.

Higher inflation countries have different approaches. That is perhaps unsurprising as non-interest-bearing digital money would be at a disadvantage to bank deposits, which receive interest. In Latin America, this is the view, and they are sitting on their hands to see what happens elsewhere. Yet South Africa and Turkey are moving forward regardless.

In Russia, there are concerns that bank-issued private stablecoins, could become dominant and monopolistic. Central banks need to design appropriate regulation and build the necessary infrastructure to facilitate progress. In particular, they are concerned about banking monopolies in a country where Sberbank is already dominant.

China has dressed this up as progress in payment technology, downplaying its role in centralising economic and political control. The digital yuan could be a handy tool for gaining monetary influence overseas while gathering data (for credit scores, for example) and manipulating money flows domestically.

It is the Swiss who really stand out. The Swiss Franc has been the best performing FIAT currency since the end of the gold standard, which implies they know a thing or two about the value of money. Most interesting is their continued research, yet negative stance, on CBDCs.

Wisely, the Swiss continue to research developments in CBDCs but choose not to get involved. Many central banks are suffering from FOMO, but not the Swiss. They were told their Franc would become irrelevant after the birth of the euro, but that never happened. They believe the same will happen this time.

In part, they see CBDCs as “too risky”. Instead, they have a workable regulatory backdrop that has created one of the most vibrant crypto hubs centred around Zug. They also host many of Europe’s crypto funds in a much more progressive approach than (say) the UK, which treats the industry as a pariah.

Future developments will be contingent on differing political constructs and economic priorities, but a pattern is emerging. In the less democratised world, governments can see benefits in terms of resource allocation and control. In the more developed and liberalised world, the legal and political complexities of CBDCs have prevented governments from establishing a clear view, opening the door to a private sector approach.

In part 3, we’ll look at the differences between government-controlled CBDCs, versus private sector approaches and the implications.